Big returns on private equity aren’t big enough for some blaming benchmarks

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The best-performing asset class in the $ 487 billion California public employee retirement system for the fiscal year ended June 30 was private equity, with a net return of 43.8%. However, the Sacramento-based pension plan’s $ 38.9 billion private equity portfolio has underperformed its benchmark in all periods, including the 10 years ended June 30, the longest period. reported by CalPERS.

CalPERS ‘private equity portfolio underperformed its benchmark by 1,730 basis points over one year, 56 basis points over three years, 209 basis points over five years and 147 basis points over 10 years.

Dan Bienvenue, Acting CIO of CalPERS, noted at the CalPERS investment committee meeting in September that part of the problem with perceived underperformance is the custom benchmark that evaluates investment portfolios. alternatives of CalPERS to a public equity market equivalent. For fiscal year 2021, this means that CalPERS ‘private equity portfolio was measured during a period when the stock market went from a low point in March 2020 to a rally in the equity market until March 2021.

He also noted that “the inconsistency in our approach (of private equity investing) and the lack of diversification within the asset class has led to our underperformance relative to our benchmark.”

At the same meeting, Greg Ruiz, chief investment officer for private equity, pointed out that the difficulty in measuring the performance of private equity is that “there is no benchmark that can be invested, as there is. the case with private equity “.

As a result, CalPERS does not rely solely on its personalized benchmark investment policy of the FTSE All World and FTSE All Cap Equity plus 150 basis points, he said. CalPERS officials also consider other metrics, including peer benchmarks, other asset classes and absolute performance, Ruiz told the board.

Private equity CalPERS underperformed its benchmark due to lack of consistency, lack of diversification and high costs, Ruiz said. In addition to these factors, “private equity is likely to underperform in periods of rapid appreciation in public markets, due to the adjustment of the valuations of private equity holding companies to a lower level. more measured pace, ”Ruiz said. Fiscal year 2021 was just one of those years, leading to an underperformance of the private equity portfolio.

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